Sunday, May 04, 2014

A LITTLE KNOWLEDGE UNINTENTIONALLY CAN MISLEAD THE TOO EASILY LED

“Marveling the resourcefulness of nature’s incredibly ludicrous and squandering inventions, one cannot help but wonder: what’s the point and how is this even possible? By sheer chance? Surely not.

Scottish economist and moral philosopher Adam Smith offers an answer. Exactly 238 years ago, on March 9, 1776, he published The Wealth of Nations.

In this fundamental work in classical economics, he illuminates how our incredibly complex, inventive and powerful economy works and developed—a similarly puzzling mystery to nature’s rich biological diversity.

In a nutshell: each enterprise is doing its best to prosper, yet without the “benefit” of a centralized planner. Something very simple—individual competition—results invisibly to our eye in something very complex—an efficient economy.

But how can Smith’s famous metaphor of the invisible hand of the self-regulating market explain our rich natural biodiversity? English naturalist Charles Darwin wondered too, and coined the term “Economy of Nature,” according to which life on Earth evolves without the guidance of a designer. Instead, in his book Origin of Species he explains the “invisible hand” of nature, better known as evolution.”

COMMENT

ADAM SMITH AND CHARLES DARWIN’S ideas from different perspectives have much in common. We know Darwin read “Wealth Of Nations” (he refers to it and it was taught at Edinburgh University while Darwin was a student there). Smith did not develop a theory of how commercial entities were guided by an Invisible hand, nor did he develop a theory using the metaphor of an “invisible hand” that performed a co-ordinating role, including a ‘designer’, in a parallel fashion to some incorrect theories of “evolution”. Back projecting such ideas to Smith is anachronistic wishful thinking.

The Invisible-Hand metaphor referred to something else entirely and that such an idea is used today as an analogy for Darwinian evolution is, well, sad. In fact the entire economics discipline suffers from a category 1 error in regard to the Invisible Hand metaphor.

Briefly, Smith taught Rhetoric as well as Moral Sentiments at Glasgow University. He defined metaphors as describing their “object” in a “more striking and interesting manner”, giving examples to his listeners (see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, 1762-3). The “object” is what is described by the metaphor.

Smith only used the Invisible Hand metaphor 3 times throughout his entire published works, and his definition is confirmed still today in the Oxford English Dictionary, as well as most other English language dictionaries, not often read by economists.

In no case did he use the Invisible hand metaphor in reference to “competition”, individual or combined, or as a “co-ordinating role” in a “complex economy”.

His first reference in his History of Astronomy (posthumous 1793 - written 1744-58) was to the belief of credulous Pagan Romans that their invisible God, Jupiter, fired thunderbolts from his invisible finger at non-believers and enemies of Rome in, ironically, very visible and noisy, thunderstorms.

His second reference in Theory of Moral Sentiments (1759) was to “proud and unfeeling landlords” who fed their serfs, slaves and peasantry, with food from his fields. With no other source of food, the serfs would soon expire from starvation and excessive labour; moreover, the landlord’s source of greatness would disappear without labourers. This exchange of food for work to produce more food arrangement enabled the landlords’ economy to function, on which their rule depended.

His third reference 0n Wealth Of Nations, (1776), was to those merchants who avoided trading abroad for fear of losing their capital to unscrupulous foreign traders and therefore they preferred to invest it locally in their “domestic industry” and thereby added to domestic output. Their “insecurity” helped to grow the economy.

The philosophical point Smith was making had to do with what agents (those who acted) were “led” to do by their motives. He started with the plausible but invisible motives of the actors - we cannot see into the minds of other people, in these 3 cases: the ‘credulous’ Romans, the ‘unfeeling’ landlords and the ‘insecure’ merchants. He then identified the (plausible) visible actions that followed from their motives: the ‘credulous’ cowered in fear during thunderstorms and remained at home, not elsewhere conspiring against their emperor; the ‘unfeeling’ landlords shared some portion of ‘their’ crops with their fieldworkers, and the ‘insecure’ merchants, invested their capital which necessarily added to the capital available in the domestic economy.

The actors’ motives “led” them to their chosen actions which were intended to produce their intended consequences - loyalty to Rome, sufficiently-fed labourers to undertake heavy field-work, and to secure the profitable and safe use of the merchants’ capital.

However, Smith added another set of consequences from their initial actions, were important enough for him to mention, specifically. In time the intended consequences from the agents' initial actions also had “unintended consequences”.

Superstitious Romans remained loyal to Rome from their fears of Jupiter's lightening strikes, therefore this added, unintentionally, to political stability; field labourers laboured more effectively with regular food, which had the ‘unintended consequences’ over the long-run from continued procreation of the species; and GDP was maintained at a higher level, long-term from insecure merchants investing locally.

Of course, unintended consequences were not always positive. If real conspirators moved freely in defiance of the credulous beliefs about lightening strikes being other than random, they could, perhaps catch a garrison by surprise and seize power in a rebellion, as happened in far away parts of the Empire (also see Shakespeare’s play about the coup against “Julius Ceasar’); if “unfeeling landlords” disregarded the quality of the serfs’ food or its amount, then health losses would cause labour shortages and a relative decline in an individual landlord's “greatness”; and if domestic-focussed merchants also prevented any imports with lobbying for tariffs, they could slow GDP growth and weaken the economy, not strengthen it.

Now you do not get such analysis from modern economists who have invented wholly spurious interpretations on Adam Smith’s use of the “invisible hand” metaphor, worse they have invented a mythical entity that does not exist, 'miraculously' at work in an economy.

Visible prices play the co-ordinating role in economies. No economy can work without visible prices. There is no 'directing hand' at work. Simple, eh?